TMI Blog2006 (10) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... er or direction under Article 226/227 of the Constitution of India setting aside assessment order dated March 21, 2005 and directing Assessing officer to exercise his powers ignoring the Instruction No. 3 of 2003 dated May 20, 2003(see [2003] 261 ITR (St.) 51). Background Facts 2. The petitioner Sony India (P) Limited is a wholly owned subsidiary of Sony Corporation of Japan. It was incorporated on November 17, 1994 and commenced manufacturing activities in March 1995. The petitioner is engaged in assembling, manufacturing and distribution of electronic goods including colour television and audio products. During the previous year relevant to Assessment Year (AY) 2003-03, besides the aforementioned activities it also imported from its associated enterprises high end products such as DVDs, Handy Cams, Play Stations and Projectors etc. for sale in India. 3. The Finance Act, 2001 substituted the earlier section 92 of the Income Tax Act 1961 ("the Act") with section 92 to 92 F with effect from March 1, 2002. These provisions are found in Chapter X of the Act titled "Special Provisions Relating to Avoidance of Tax". The sub-heading reads "Computation of Income from Intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d adjustment on account of ALP of the international transaction be not added to the income. After considering the petitioner's objections, the Assessing Officer passed issued the assessment order dated March 21, 2005 assessing the income of the petitioner for assessment year 2002-2003 at Rs. 59,92,40,000 and the tax payable thereon was determined as Rs. 26,52,66,896. The petitioner has filed an appeal against the said assessment order dated 21.3.2005 before the Commissioner of Income Tax (CIT) (Appeals) and the said appeal is stated to be pending. 8. Consequent to the assessment order, a demand was raised asking the petitioner to pay the tax within seven days as against the usual period of 30 days. This led to the petitioner filing Writ Petition (C) No.5301 of 2005. Pursuant to certain orders made by this Court in the said petition, the petitioner paid Rs. 2 crores on March 30, 2005 and the said writ petition was disposed of on May 12, 2005. Thereafter, the petitioner filed the present writ petition challenging the Instruction No.3 of 2003 issued on May 21, 2003 by the Central Board Direct Taxes as well as the assessment order dated March 21, 2005 by which the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structions cannot control the law and set at naught the statutory framework for the exercise of discretionary powers by quasi judicial authorities. (d) The ultimate decision on the computation of the ALP is that of the Assessing Officer under section 92C. However, that is now sought to be supplanted by the decision of the Transfer Pricing Officer for transactions of the value over Rs.5 crores. Moreover, the Transfer Pricing Officer is not bound to follow the steps outlined in section 92C (1), (2) and (3) which are otherwise mandatory for the Assessing Officer to follow. In the absence of any specific provision in the Act permitting this, a Central Board Direct Taxes instruction cannot be permitted to bring about this change. 10. Mr. Sanjeev Sabharwal, learned counsel for the respondent submits that a reference under Section 92 CA will be made by the Assessing Officer only where he "considers it necessary or expedient so to do". There may be several instances in which the Assessing Officer may exercise his discretion and this could include transactions of the value in excess of Rs. 5 crores. He further submits that view expressed by the Transfer Pricing Officer is not binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e market price (or arm's length price as it is referred to in the present context) and in turn the subsidiary is able to avoid, partly or wholly, payment of the local tax. Although the expression "transfer price" has not been defined in the Act, it is understood to mean "that price which is arrived at when two associated or related enterprises deal with each other" ( Kanga, Palkhivala and Vyas, The Law and Practice of Income Tax, Ninth edition (2004) page 1532). It was acknowledged by the Finance Minster in the Budget Speech for the year 2001 that "the presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions has made the issue of transfer pricing a matter of serious concern." The purpose of inserting these provisions is therefore to determine the arm's length price (ALP) of an international transaction involving an MNC and its local associate. 13. Under Section 92 B (1) "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d maintained by the assessee in accordance with the provisions contained in sub-section (1) of Section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of Section 92D. the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him : Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm's length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer." 16. Sub-section (3) of section 92C envisages the Assessing Officer having to form an opinion on the existence of the factors enumerated in clauses (a) to (d) as a pre-condition t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the international transaction in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing officer and to the assessee. (4) On receipt of the order under Sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of Section 92 C having regard to the arm's length price determined under sub-section (3) by the Transfer Pricing Officer. (5) With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend any order passed by him under sub-section (3), and the provisions of section 154 shall, so far as may be, apply accordingly. (6) Where any amendment is made by the Transfer Pricing Officer under sub-section (5), he shall send a copy of his order to the Assessing Officer who shall thereafter proceed to amend the order of assessment in conformity with such order of the Transfer Pricing Officer. (7) The Transfer Pricing Officer may, for the purposes of determining the arm's length price under this section exercise all or any of the powers specified in clauses (a) to (d) of sub-section (1) of section 131 or sub-section (6) of section 133." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion contemplates reopening of the completed proceedings not for the benefit of the assessee but in the interests of the Revenue. It contemplates a situation where the case before the Commission cannot be satisfactorily settled unless some previously concluded proceedings are reopened which would normally be to the prejudice of the assessee. It is precisely for this reason that the section says that it can be done only with the concurrence of the assessee and that too for a period within eight years. This section cannot be read as empowering the Commission to do indirectly what cannot be done directly .. The power conferred by Section 245-E is thus a circumscribed and a conditional power. It can be exercised only in accordance with and subject to the conditions aforementioned and in no other manner." (emphasis supplied) 19. The exercise of the discretion by the Assessing Officer is required to be preceded by the formation of an opinion by the Assessing Officer of the necessity or expediency of making such a reference. However, what is not apparent is the nature of such opinion. Is this a prima facie opinion or a considered opinion after examining all available materials ? T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scheme is that after the Transfer Pricing Officer determines the ALP the matter revives before the ALP at the section 92C (4) stage where, in terms of section 92CA(4) the Assessing Officer will compute the total income "having regard to" the ALP determined by the Transfer Pricing Officer. 21. The two aspects require to be taken note of in this context. The Assessing Officer will necessarily have to give an opportunity to the assessee after receiving the report of the Transfer Pricing Officer and before he finalises the assessment computing the total income. Secondly, the provisions do not mandate that the Assessing Officer is bound to accept the ALP as determined by the Transfer Pricing Officer. And for good reason because the Assessing Officer has himself not made up his mind at the stage about the ALP. He has, in a sense, only "outsourced" this exercise to the Transfer Pricing Officer. He can always be persuaded by the assessee at that stage to reject the Transfer Pricing Officer's report and proceed to still determine the ALP himself. It must be recalled that it is the Assessing Officer who is the authority to finalise the assessment and that power cannot be usurped, as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 496 of ITR) : "... even when he proceeds under sub-section (2) he has to determine the net value of the business as a whole having regard to the balance sheet of such business as on the valuation date; the phrase "having regard to the balance sheet of such business" as judicially interpreted means that the Wealth Tax Officer has to take into consideration or account the balance sheet of such business for such valuation and not that such balance sheet is conclusive or binding or decisive of the values of assets appearing therein." 24. In relation to section 23A of the Income-tax Act 1922, where a similar expression occurred, the Supreme Court in CIT v. Gangadhar Banerjee and Co. P. Ltd. [1965] 57 ITR 176 adopted the reasoning of the Privy Council in CIT v. Williamson Diamonds [1959] 35 ITR 290 to hold that the Income Tax Officer's power is not circumscribed by the conditions preceding those words and that he can consider any other matter relevant to the question. In the latter case it was held (page ITR 297) : "The form of words used no doubt lends itself to the suggestion that regard should be paid only to the two matters mentioned, but it appears to Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities and ultimately the courts. (b) The words "necessary and expedient" occurring in other provisions of the Act and other statutes have been interpreted judicially to admit of a strict construction permitting the power to be used only in the manner and subject to the conditions stipulated in the provision. (c) The words "necessary and expedient" posit the formation of an opinion by the Assessing Officer of the need to make such a reference. However, a reading of section 92C and 92CA does not indicate that the Assessing Officer is required to form a prior considered opinion after considering all the available materials even before making a reference to the Transfer Pricing Officer. A prima facie opinion would suffice at the stage of making the reference. (d) The Transfer Pricing Officer is expected to perform the same exercise as envisaged under section 92C (1) to (3) while determining the ALP under section 92CA (3). (e) The Assessing Officer is not bound to accept the ALP as determined by the Transfer Pricing Officer. He can always be persuaded by the assessee at that stage to reject the Transfer Pricing Officer's Report and proceed to still determine the ALP himself. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted for scrutiny of transfer price and these are dealt with effectively. The Central Board Direct Taxes, therefore, have decided with wherever the aggregate value of international transaction exceeds Rs.5 crores, the case should be picked up for scrutiny and reference under Section 92CA be made to the Transfer Pricing Officer. (d) If there are more than one transactions with an associated enterprise or there are transactions with more than one associated enterprises the aggregate value of which excess Rs.5 crores, the transactions should be referred to the Transfer Pricing Officer. Before making reference to the Transfer Pricing Officer, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. (e) The threshold limit of Rs.5 crores will be reviewed depending upon the workload of the Transfer Pricing Officers. (f) The role of the Transfer Pricing Officer begins after a reference is received from the Assessing Officer. In terms of Section 92CA this role is limited to the determination of arm's length price in relation to the international transaction referred to him by the Assessing Officer. (g) The transfer price has to be deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Constitution. It is only where such classification is not based on an objective intelligible criteria and which bears no nexus to the object sought to be achieved that it will invite constitutional invalidation on the anvil of Article 14. The twin test of classification propounded first by Das J., in State of West Bengal v. Anwar Ali Sarkar AIR 1952 SC 75 and later stated authoritatively in Shri Ram Krishna Dalmia v. Justice S.R. Tendolkar AIR 1958 SC 538 continues to be the lode star guiding judicial exegesis to the present day. 32. Applying the above test, the impugned instruction cannot be held to violate Article 14. The classification brought about by the impugned instruction is based on a straightforward recognizable basis giving no room for confusion. Transactions of a high value require a careful examination to determine if the declared price is in fact an acceptable ALP. It may not be expedient for the Assessing Officer to efficiently deal with the assessment involving such an exercise. In that sense it achieves the expedient disposal of the assessment by the Assessing Officer if the exercise is referred for a specialised determination by the Transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 92C read with Section (4) of Section 92CA." (emphasis supplied) 35. The above passage makes it clear that the Transfer Pricing Officer has to determine the ALP "in accordance with sub-section (3) of Section 92C." Further in sub-para 2 it reiterates that "the transfer price has to be determined by the Transfer Pricing Officer in terms of Section 92C." Thereafter it stipulates that "price has to be determined by any one of the methods stipulated in sub-section (1) of Section 92C and by applying the most appropriate method referred to in section (2) thereof." It further refers to Section 92CA (3) which states that Transfer Pricing Officer shall "by an order in writing, determines the arm's length price in relation to the international transaction in accordance with sub-section (3) of Section 92C and copy of his order should be made available to the Assessing Officer." 36. Since the extracted portions of the impugned instruction is based on a correct understanding of the legal position, the question of the Central Board Direct Texas's binding instruction being contrary to the statute does not arise. The instructions are consistent with section119 of the Act and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itating such expediency, then it will require to be reviewed. This is an in-built safeguard that is a sine qua non for the continuance of the instruction beyond the period for which it is initially envisaged to operate. Secondly, it is expected that in due course there will be available to Assessing Officers a database of decisions handed down by the Transfer Pricing Officers who are expected to officers more experienced than the Assessing Officers. This database will doubtless be a useful guide to the Assessing Officers in their determination of ALP. Once this object is achieved, it may not be necessary to continue with the instruction. However, this is ultimately for the Central Board Direct Taxes to decide taking into account all relevant factors that will impinge on the decision to continue the impugned instruction. 39. For these reasons, we hold that the impugned Instruction No.3 dated 20.5.2003 issued by the Central Board Direct Taxes is consistent with the statutory objective underlying section 92CA(1) and acts as a guidance to the Assessing Officer in the exercise of discretion in referring an international transaction to the Transfer Pricing Officer for determination o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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